Macro risk analysis - Daily Form for May 31, 2011


Inter-market Technical Analysis using algorithmic pattern detection


TUESDAY MAY 31, 2011       11:15:00 GMT




In Friday’s column I pointed to the rather over-stretched downside action in the Shanghai index and concluded with the comment that I would expect to see a counter-trend rally in next week’s trading.

In Asian trading on Tuesday the index moved up 1.4% after registering a doji star in Monday’s trading and the more aggressively oriented Hang Seng Index registered a 500 point upward move and a 2.2% gain.

Targets for the intermediate term on the Shanghai could be ratcheted upwards from the 200 day EMA at 2860 all the way up to the base of the cloud formation above 2900. As discussed below, the exchange traded fund, PGJ, would be one vehicle to look at as long as the relief rally prevails.



Also as suggested on Friday the continuing weak economic data coming out of the US is actually supportive of higher equity prices. Despite the Memorial Day holiday in the US yesterday (and the UK also was closed for a bank holiday) the S&P 500 futures have made quite significant progress since the close of North American trading last Friday.

The break above the trend line drawn on the 240 minute charts activates targets in 1350’s again.



The last time I discussed AUD/USD I indicated that the Aussie was having difficulty in breaking above the cloud formation on the daily chart.

This condition has persisted and I would suggest that the balance of probabilities is now favoring further consolidation within the cloud and, should we see a clear break below the level indicated on the chart i.e. 1.0470, this would then expose the 1.0350 level at the base of the cloud.



PGJ, is an ETF which invests at least 80% of total assets in equity securities of companies deriving a majority of their revenues from the People’s Republic of China, and, as indicated above, I would be looking at a long position with a target of approximately $28.


Macro risk analysis - Daily Form for May 27, 2011


Inter-market Technical Analysis using algorithmic pattern detection


FRIDAY MAY 27, 2011       11:23:00 GMT




The Chinese market has dropped for the last several sessions and the Shanghai index closed Friday’s session just above the 2700 level which is an area of chart support and also right on the 20 day lower Bollinger band.

One would expect to see a counter-trend rally in next week’s trading.



1325 is now a technically significant level for the S&P 500 futures as indicated on the hourly chart. In yesterday’s commentary I noted that the background environment remains reasonably supportive for US equities and after yesterday’s weak data on GDP and jobs one has to factor in the possibility of possibly new initiatives by the Fed to support asset prices during the summer months.



Fading rallies on EUR/USD has been quite profitable this morning and the 15 minute chart - a lower time frame granularity than I normally feature here - shows that $1.4180 is a fairly key level for the single currency for the remainder of today’s trading.

A break below that would expose two more key support levels at 1.4080 and then the low from Monday’s trading in the vicinity of $1.40.


Macro risk analysis - Daily Form for May 26, 2011


Inter-market Technical Analysis using algorithmic pattern detection


THURSDAY MAY 26, 2011       10:57:00 GMT




As we head into an extended weekend with Monday as a holiday in several markets, markets are lacking any sense of conviction and direction. As an illustration of the scarcity of any catalysts to move FX and equities there was some effort to rally the euro in Asian trading based on releases that the Chinese were looking at supporting the EZ’s financial stability facility - the EFSF. The only problem with this story is that it is really old news and the PBOC has shown on a number of occasions that it wants to support the EZ and the euro. As the largest holder of liquid reserves - including a huge amount of euro denominated paper - it would be foolhardy for them to say anything other than that they support the EZ and its currency.

The SP 500 futures are struggling at the 1320 level but my intuition is that there was too much zeal in selling risk on assets on Monday - that was the day that EUR/USD was pushed to the $1.40 precipice - and that the slow and grinding short covering could continue into to the weekend, providing a neutral to positive environment for US equities. However, I say that without much conviction. To move to something on which I have more conviction - no matter what the short term direction in EUR/USD, the trend in EUR/CHF remains decidedly bearish for the EZ currency against the Swiss franc, as new historic lows for the pair continue to be registered.

Readers may wish to have a look at a rather gloomy assessment of the prospects for the single currency which can be found here.



GBP/USD has rallied in harmony with the EUR/USD short covering already alluded to, and is now in the zone between $1.6280 - $1.6330 where I am looking to sell further rallies.



The daily chart for AGG, an ETF which tracks investment grade corporate bonds, is revealing negative divergences close to a multi-period high.



It has not been a favorable environment recently for EM investors, and the chart for Vietnamese equities suggests that embryonic EM markets should still be categorized as "very high risk".


Macro risk analysis - Daily Form for May 24, 2011


Inter-market Technical Analysis using algorithmic pattern detection


TUESDAY MAY 24, 2011       10:18:00 GMT




Using a fibonacci grid overlaid on the 240 minute chart for the S&P 500 futures (June e-Mini) the sell off yesterday reached down to the 23.8% level measured off the low seen on the chart below. Technically the case could be made that we should now go back and re-test the 38% level which is in the vicinity of 1322.

Given that the masters of market timing, Goldman Sachs, are now telling clients that the commodities correction is over I would even expect 1325 on the futures to be tested again soon - quite possibly today.

However, as indicated on the chart the highlighted area between 1320 and 1325 is likely to be choppy and only suited for scalpers. While bad economic news has been good news for equities for the last 2 years, as Chairman Bernanke remains super accommodative, the risks from another financial accident in the Eurozone remain high, so outright long positions in US equities are not on my agenda for the time being.



Related to the positive call on commodities one has to take a good look at AUD/USD and as the daily chart indicates the Australian dollar reached a fairly critical level during yesterday’s session.

The fact that we have bounced off the cloud suggests that a short term rally may be ahead but longer term, the violation of the sloping trend line on the chart suggests to me that the $1.0340 level will need to be tested.



Given the acumen of the GS prop trading desk it may well be time to look at XME which is reaching an area of chart support and appears to be washed out from an MFI perspective.



The US banking stocks - as represented by the KBW Banking index - have reached an area of probable chart support and one way to gain exposure on the long side to this sector is through KBE, the ETF which tracks the sector.

However I would not be looking at maintaining a long term position here, but rather a re-visit to the 50 day EMA as it is descending to converge with the 200 day EMA. If the sector fails to perform well in coming weeks - which is the way it looks likely to unfold - this would suggest that the troubles within the US and global banking sector are likely to move into the foreground again this summer.


Macro risk analysis - Daily Form for May 23, 2011


Inter-market Technical Analysis using algorithmic pattern detection


MONDAY MAY 23, 2011       08:15:00 GMT




The Shanghai Composite closed Monday’s session with a drop of almost three percent.

The technical picture, as seen on the daily chart below, shows that the index is hanging on by its fingertips to a fairly critical level around 2770. The following characteristics are all pointing to the critical levels that lie ahead.

  • The uptrend line through lows over the last several months is now in danger of being violated.
  • Today’s candlestick was a red trend day with the open at the high for the session and a failure to break back into the cloud formation
  • The close for today’s session has broken below the 20 day Bollinger Band which has been drawn with the bands set at 2.5 standard deviations from the mean. The probability of this happening is approximately 2%.

    The last point suggests that a short term bounce could arise in the next couple of sessions but, the clear exit from the green cloud formation suggests that this index will be definitely struggling to regain positive momentum in the intermediate term.



    The S&P 500 futures are sliding as a clear risk off mood has been evident in Asian trading and is setting the tone as European traders in FX are pressuring the euro and commodity currencies.

    The 240 minute chart suggests that if 1315 which has been highlighted is taken out -- which seems highly probable - then the bears will be targeting a test of the 1290 in the near term.



    EUR/CHF has broken decisively below 1.24 and at the time of writing is now at a new historic low around 1.2350.

    While much focus will be on the EUR/USD rate - which at the time of writing looks ready to break below $1.40 - the attrition in the euro against the Swiss franc underlines the fact that the smart money in Europe is exiting the single currency in droves.

    On the subject of the highly unstable situation with regard to sovereign debts of EZ states and the uncertainties posed by the demise of Dominique Strauss-Kahn, readers may find the following article on the selection procedure for electing a new IMF head worth a look. The article also contains some comments on the lack of a coherent strategy (at least so far) from the BRIC nations, especially China, to use the election process as a way of addressing the outmoded nature of the IMF’s voting structure.



    GBP/USD has had a 1.6 handle for most of this calendar year, but the likelihood of a drop back into the 1.50’s is increasing as the dollar is gaining a bid in the midst of the troubled state of the EZ.

    My forecast for this week’s range would be $1.6280 on the upside where I would want to be a seller and $1.5850 on the downside where I would be prepared to nibble on the long side.






    TRADE OPPORTUNITIES/SETUPS FOR MONDAY MAY 23, 2011


    The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions.
    None of these setups should be seen as specifically opportune for the current trading session.
    For a more comprehensive listing of price formations detected by our pattern recognition algorithms please visit TradeWithForm





    DBC  PowerShares DB Commodity Idx Trking Fund  

    DBC, a sector fund tracking overall commodity prices, shows that bearish flag/pullback patterns are in evidence which translates into an overall trading stance of seeing all rallies as opportunities to build new short positions.




    PPLT  ETFS Physical Platinum Shares  

    PPLT, an exchange traded for platinum, is another candidate where aggressive hedge funds will tend to see any strength from rallies as opportunities to either unload existing long positions or initiate new short positions.




    AUDCHF    

    AUD/CHF, often discussed in this commentary as a useful barometer of macro risk, seems destined to test the level indicated by the arrow on the chart during the course of this week.



  • Macro risk analysis - Daily Form for May 9, 2011


    Inter-market Technical Analysis using algorithmic pattern detection


    MONDAY MAY 9, 2011       08:39:00 GMT




    Amongst the many contributory factors to last week’s massive liquidation of long positions in many commodities was an accompanying unwinding of many of the FX pairs which are supportive of risk on positioning. The Australian dollar succumbed to the selling pressure which was becoming evident on the charts after achieving a key objective of peeking above $1.10, the yen strengthened, and on Friday afternoon there were rumors that Greece might be contemplating an exit from the Eurozone.

    Whether or not these rumors amount to anything - and they just might - the reaction for EUR/USD and other key cross rates was to add further to the plunge instigated by J.C. Trichet’s less vigilant remarks after Thursday’s ECB rate decision.

    Silver was an accident waiting to happen and I would still stay away from that metal, gold could be a better bet but there is a short term bear flag developing on the spot chart for the precious metal. The commodity which suffered one of its worst trading weeks in many years was crude oil.

    While there would seem to be a capacity for a bounce in crude - and OIL, the exchange traded fund could be a useful vehicle - my suspicion is that the primary beneficiary from improved "sentiment" based on less influence from the raw materials inflationistas will be equity markets.

    The hourly chart below for the S&P 500 futures shows that a downtrend line has been pierced and targets back in the mid 1350’s seem feasible in the near term.

    I am very pleased to have been invited as a guest speaker to the China FX Forum to be held in Beijing this Thursday, details of which can be found here .
    As I shall be travelling during the rest of this week, the next Daily Form commentary will not appear until early next week.




    When I last wrote about GBP/USD last Thursday - right after the BOE and ECB rate decisions - the current prize zone was targeted.

    Sterling has been in decline during European trading this morning and the inaction by both the BOE and the ECB suggests, to me at least, that the key zone between $1.6420 and $1.6380 is now in play.

    The current level around $1.6380 is a pivotal one for sterling, and it was the breakthrough the current zone which propelled GBP/USD to higher levels towards 1.70.

    To a large extent the near term direction of sterling will be influenced by the trajectory of the euro - which still remains in an uptrend on the daily chart but where a failure of the key $1.4240 level for the EZ currency could assist in knocking out the support for sterling.

    As always the relative "strength" of both the euro and sterling speaks volumes about persistent US dollar weakness, as it is only that which is enabling both European currencies to hang on to their relatively positive patterns against the US currency despite their own domestic issues which would suggest lower values.

    Indeed GBP and EUR are not faring so well as can be seen in the comparative chart with the Swiss franc below.



    Regular readers of this column will recall that I have maintained a long term positional play where I remain short the euro against the Swiss franc.

    The news on Friday and the ongoing problems facing the peripheral EZ states are not going to be solved any time soon and the 1.25 level looks attainable again, at which point I may lighten up the position somewhat and wait for another move up in the euro towards 1.28 before re-instigating additional short positions.



    Measuring the relative strength of various currency pairs can be done using a separate benchmark such as determining the price of gold for each currency, and then creating an index to see how much more or less the gold price in that currency is now rather than it was priced at the base period for the index.

    The method chosen to prepare the chart above is simply to contrast the current relative performance of six major currency pairs - each with the Swiss Franc as the base currency. The starting period chosen is the end of July 2007 which marked an important inflection point for most FX pairs.

    The results clearly show that GBP/CHF is the weakest pair, and as of the Friday May 6th closing price, sterling is 38% less valuable against the Swiss Franc than it was at the end of July 2007.

    The other results are as follows, in descending order:


    • JPYCHF is up by 2%
    • AUDCHF is more or less at par
    • CADCHF is down 18%
    • EURCHF is down 20%
    • USDCHF is down 30%


    The strength of the yen underlines the peculiar position that the Japanese yen occupies in the FX market - both as a key component of the FX carry trade, and, less now than a few months ago, indicative of the yen’s traditional relative safe haven status even vis a vis the Swiss franc

    Of the key commodity currencies the Australian dollar has more or less retained its position at par value, while the Canadian dollar has performed more or less in line with the euro, as both have declined by similar amounts of approximately 20%.

    The US dollar has declined by 30 % but the wooden spoon clearly goes to sterling.

    Unsurprisingly, the notable under-performance of GBP/CHF, and the associated lack of purchasing power of sterling, is manifesting itself in higher domestic inflation in the UK

    What is perhaps more remarkable is that yields on 10 year gilts are still relatively similar to those on 10 year bunds and 10 year UST’s, indicating that global asset allocators are not demanding much of a risk premium for holding obligations in, by far, the weakest of the major currencies.


    Macro risk analysis - Daily Form for May 5, 2011


    Inter-market Technical Analysis using algorithmic pattern detection


    THURSDAY MAY 5, 2011       12:30:00 GMT




    There is a line of chart support illustrated on the 240 minute chart for the S&P 500 futures which is very close to the current level around 1336.

    However, several technical indicators are at high risk levels raising the possibility of large scale risk on asset liquidations so I will be standing aside on US equities until the FX/commodities backdrop becomes more transparent, which I would expect to occur during the next 36 hours of trading.

    A break below 1325 could bring out a band wagon of short sellers - and especially worth monitoring in trading today and tomorrow is the performance of USD/JPY as the abrupt strengthening of the yen was the trigger to the flash crash which occurred exactly one year ago tomorrow.



    The BOE has not budged - which was not a surprise - but nor has M. Trichet which was perhaps a little bit surprising. But weak economic data in Australia plus the unwinding of some large risk on trades is causing a lot of selling in the Aussie dollar. In characteristic fashion, the liquidity on the way down for this currency is often thin and this accelerates the down thrusts.

    AUD/USD broke way below my initial target of $1.0775 laid out here earlier this week, and the next two retracement targets, while the commodity/risk on players run for cover, are indicated on the 240 minute chart below.



    Sterling has been in decline during European trading this morning and the inaction by both the BOE and the ECB suggests, to me at least, that the key zone between $1.6420 and $1.6380 is now in play.



    USD/JPY has fallen below the 80 level, raising some possibility of central bank intervention but the underlying message from the chart is that the unwinding of some FX carry positions is accompanying the retreat from risk.






    TRADE OPPORTUNITIES/SETUPS FOR THURSDAY MAY 5, 2011


    The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions.
    None of these setups should be seen as specifically opportune for the current trading session.
    For a more comprehensive listing of price formations detected by our pattern recognition algorithms please visit TradeWithForm





    SLV  iShares Silver Trust  

    The bloodbath in silver continues as there has been a complete evaporation of bids in the last few sessions.

    SLV closed yesterday's session in the vicinity of $38 but the spot market has broken down further into the $37 zone in trading since the ETF closed trading yesterday. However I would stand by my target from earlier this week, and even though I would certainly not be a buyer I would exit all short positions for the time being.




    DBV  PowerShares DB G10 Currency Harvest  

    Yesterday's comment on DBV is worth repeating:


    DBV, which acts as an ETF proxy for the FX carry trade, appears to have stalled at the top of its rebound from the Japanese selling climax in late March.





    BKF  iShares MSCI BRIC Index  

    BKF, one of the main sector funds which track the BRIC economies, could find some support from both the 200 day EMA as well as the cloud formation. Also evident on the MFI chart is the distribution which has been taking place in the EM asset class over the last few weeks.




    RSX  Major Vectors Russia ETF  

    RSX, an exchange traded vehicle providing exposure to Russian equities, is falling along with the energy complex and the 200 day EMA would seem to be a feasible target.




    OIH  Oil Services HOLDRS  

    OIH, one of several exchange traded funds in the energy related field, looks vulnerable - perhaps down to the level indicated by the arrow on the chart.




    DBC  PowerShares DB Commodity Idx Trking Fund  

    Thursday's European session has revealed several clear manifestations that risk aversion is now uppermost for many fund managers. Commodities are getting sold across the board as well as the commodity currencies.
    An anticipation of this can be found in this comment from Tuesday's column


    DBC, a sector fund tracking overall commodity prices, is revealing some negative MFI and RSI divergences.




    Macro risk analysis - Daily Form for May 4, 2011


    Inter-market Technical Analysis using algorithmic pattern detection


    WEDNESDAY MAY 4, 2011       10:11:00 GMT




    Risk on momentum players are now experiencing headwinds as EM, many commodities and, most importantly, Chinese equities appear to be on the defensive.

    Shanghai took a rather sharp 2% plus move to the downside in Asian trading. The highlighted data on the right hand side of the chart shows that there are several key intersections - the cloud base, the 200 day EMA and the lower Bollinger band - in the proximity of today’s close, and if a bounce does not materialize at such a technically supportive zone, this could trigger a lot of long liquidations.

    On the subject of China I am very pleased to have been invited as a guest speaker to the China FX Forum to be held in Beijing on May 12th, details of which can be found here .



    AUD/USD came within a whisker of the target outlined here last week. While another move back towards the $1.10 level could well unfold, the momentum appears to be fading for the Aussie dollar as evidence of risk aversion is mounting across other related asset classes.

    Also I shall be watching the Friday close of AUD/CHF quite closely this week as a trend line violation on the weekly chart for this pair would be another negative for risk appetite.



    DBV, which acts as an ETF proxy for the FX carry trade, appears to have stalled at the top of its rebound from the Japanese selling climax in late March.



    A final indicator for today’s theme that the tide may be turning for the fully blown risk on asset allocation strategies is the ongoing weakness of the Brazilian index.

    One would expect to see a "double bottom" close to current levels but the technical tones for this index, along with that for Mumbai which I discussed here yesterday and during a slot on CNBC’s European Closing Bell yesterday, does not, at least in my estimation, appear to be sending out strong "buy the dip" signals.


    Macro risk analysis - Daily Form for May 3, 2011


    Inter-market Technical Analysis using algorithmic pattern detection


    TUESDAY MAY 3, 2011       10:48:00 GMT




    After a royal wedding, the death of Osama bin Laden and an extended bank holiday weekend in the UK, returning to the trading arena reveals that there are some interesting new dynamics at work in the markets.

    One of the most notable has been the sharp sell-off in silver which dropped $6 /oz in the course of just one hour during the overnight session on Monday morning (following the news about bin Laden). Spot silver then staged a rather remarkable recovery during the North American session yesterday but once again the selling has resumed and the metal appears to be struggling at a fairly critical juncture.

    Here again is my comment from last Thursday’s commentary which can also be found here.

    The weekly chart for spot silver is developing the kind of parabolic price behavior which could, in my estimation, lead to a blood bath at some point in the not too distant future.




    In a speech yesterday to the EU Commission, the BOE’s governor Mervyn King spelled out quite lucidly the case for continuing with a very accommodative monetary policy - not only for the UK but also for continental Europe. Whether this would impact on the ECB’s thinking is doubtful but the case for the hawks within the UK’s MPC faces an uphill battle with King so, apparently, committed to maintaining the historically low base rate of 0.5% for the foreseeable future.

    UK PMI numbers also released this morning were weaker than expected and sterling has been on the back foot since. There is support around the $1.6420 level which appears to be on the radar for testing as this is being written, but I shall stand by the view expressed here about a week ago that in the medium term (i.e. next week or so) sterling should seek out a re-test of the pivotal $1.6280 level.



    The Mumbai Exchange closed down with a 2% plus loss after the Indian central bank hiked its short term rates by 50 bps rather than the expected 25 bps.

    Reviewing the technical condition of the index the triangular formation - highlighted by the descending trendline through the most recent highs - indicates that this index will soon reach an important inflection point and, while containing inflationary pressures remains very much at the forefront of the central bank’s agenda, the resolution of this price convergence at the apex becomes rather critical for those (including myself) who are long term bulls on this key BRIC market.



    GBP/CHF is breaking down to new multi-year lows as the Swiss franc continues to benefit from flight to safety for many global asset allocators.






    TRADE OPPORTUNITIES/SETUPS FOR TUESDAY MAY 3, 2011


    The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions.
    None of these setups should be seen as specifically opportune for the current trading session.
    For a more comprehensive listing of price formations detected by our pattern recognition algorithms please visit TradeWithForm





    IBM  International Business Machines Corp.  

    The daily chart for IBM, which has recently been registering all time highs, reveals a rather noteworthy doji star following the previous session's shooting star candlestick. This candlestick sequence can be a precursor to a change or pause in the current trend, although, it must also be acknowledged, the volume and money flow characteristics still look technically supportive.




    XBI  S and P Biotech ETF  

    Many ETF's look rather over-extended at current levels, and even though the Fed's stance is still supportive of higher equity prices in general, XBI in particular caught my eye for both its negative volume divergences as well as the fact that it has been tagging the upper Bollinger band during the last couple of sessions.




    DBC  PowerShares DB Commodity Idx Trking Fund  

    DBC, a sector fund tracking overall commodity prices, is revealing some negative MFI and RSI divergences.




    SLV  iShares Silver Trust  

    SLV, the exchange traded fund for silver, reveals the very heavy volume that has come into this sector as a consequence of the first real correction in the almost parabolic rise of the last year.

    The 50 day EMA around $38 could be an aggressive target for those who sense that, while gold may still be an attractive asset on the long side, the junior precious metal has plenty of scope for further retracement of the extraordinary gains since last summer.